International Models of Disinvestment

Background

By the mid-1980s, around the globe, the pendulum of political option was swinging decisively towards the view that the proportion of the GNP due to Government economic activity should be reduced to the extent possible. This coincided with the belief that even for natural monopolies, effective regulatory surrogates for competition could be devised that would protect the consumers from the abuse of the monopoly power of these companies.

Many eminent economists argued that Governments must not venture into those areas where the private sector can invest and also run the enterprises efficiently. Lot of emphasis was laid on market driven economies, rather than state administered economies. The collapse of the socialist economy of the Soviet block convinced the policy planners, around the world, that the role of the state should be that of a regulator rather than the producer. The resources deployed by the Government for undertaking commercial activities should be unlocked and deployed for the social activities.

During the 1980s, the disillusionment witnessed in the socialist economies added to the disenchantment with the public sector in the mixed economies in the world. USSR started the economic reforms under perestroika, which swept the economies of Eastern Europe. China also introduced economic reforms and it was recognized that public sector did not optimize efficiency and productivity of capital. It was realized that the large number of public enterprises working under mixed economies were victims of over centralisation in decision making and excessive bureaucratisation.

UK

The Margaret Thatcher government, spread over 11 years, went on an aggressive disinvestment spree in the 1980s in the UK, borne out of the conviction that the government had no business to be in business. It let loose most of its stake at one go. British Telecom, British Airways, British Power, British Petroleum, British Gas, British Rail and Regional Water Boards are just a few examples. During its first wave of large-scale privatisation, UK witnessed about 670 PSUs worth US$ 5.3 billion being privatised with the water companies fetching over US$10 billion, British Gas about US$13 billion, and British Petroleum over US$12 billion.

Public offers were one of the frequently used techniques in the UK to transfer state assets and businesses to private ownership. The method was fairly successful, having increased the shareholding population from 4% to 25% and resulting in a 60% reduction in public sector employment. For example, British Telecom alone created 2.1 million shareholders in the UK, when privatised.

What were the lessons learnt from the exercise carried out in the UK? Consequent to privatisation of telephones, electricity and gas supply, the cost of services fell, and quality of performance also did improve. However, it was found later that the water supply companies raised the prices by 15 per cent, and buyers of new homes were required to cough up six times the previous charges for obtaining a pipe connection from the water mains. Deregulation of the bus services outside London led to a fierce and somewhat unhealthy competition. For instance, in Manchester the 60-odd private operators resorted to speeding along the routes, trying to beat their competitors to bus stops.

Privatisation did not lead to greater competition in all cases. For instance, some of the public monopolies became private monopolies and have only exploited their position to earn higher profits. It is now argued that some of the natural monopolies which had been sold off should have remained under government control to prevent duplication of resources.

EASTERN EUROPE

With the UK having taken the lead, the former citadels of Socialism soon embraced the new mantra, breaking up state monopolies and selling them to private parties choosing to let market forces determine their future course.

OTHER EXAMPLES

Germany privatised 13,500 companies by selling off its stake in a span of two years.

In the UK and much of South America, Eastern Europe and Russia, the idea behind privatisation was not merely to raise money, but was also driven by ideology – privatize swiftly at all costs to increase the firm's efficiency and profitability and benefit the economy as a whole.

Usage of Funds

Most nations spent a substantial chunk of their privatisation proceeds for meeting their budget deficits. Many countries attempted, however, to build a political consensus and garner public support for the process of privatisation by setting aside disinvestments revenues for 'noble' causes. In Ukraine, for instance, revenues were credited to the State Privatisation Fund (kept outside the budget) and legislation explicitly prohibited the use of revenues from privatisation for covering the budget deficits.

In Estonia, the government used privatisation revenues for development projects only as long as the fiscal deficit was contained at a specific level (fixed at 3.9% of GDP in '01).

Articles on Country Privatisation from the Carnegie Council Privatisation Project

Given below are some country – specific articles on Privatisation published by the Carnegie Council Privatisation Project.